New Long Plays
On its company's website, AMR Corporation describes itself as the largest airline in the world. AMR Corporation is the parent company of American Airlines, Inc. and American Eagle Airlines, Inc. From the big skies of Fort Worth, Texas, AMR Corporation oversees a number of facilities and businesses under the corporate umbrella. The website credits American Airlines with contributing more than $150 billion per year to the U.S. economy. Together with its regional affiliates, it flies to 250 cities in more than 40 countries, with a U.S. market share of 17.8 percent in 2006. About 35 percent of its flying was international in 2006. (Source: Company Website)
Everyone hates the airlines, right? Not JP Morgan. On August 12, JP Morgan upgraded AMR to an overweight rating from an underweight one. Don't worry: we didn't base this recommendation on an analyst's upgrade and we don't intend to buy AMR at the current level. This trade will be based purely on technicals, and therefore should be considered an aggressive trade, particularly as we move into a part of the year when equities often hit their lowest levels.
Three weeks ago, AMR broke above a long-term descending trendline on its weekly chart, with that trendline in place since early 2007. It has since charged up to test the simple and exponential 200-day moving averages, with both grouped between $11.00 and $12.00. As it's challenged these moving averages this week, daily candles have shown upper shadows and other signs that there's been some selling into the rally. That's fine. We're waiting for a pullback to $8.40-8.60 to trigger our trade. The 50 percent retracement of its climb off its July low lies at about $8.64. Other potential support, including the simple 30-day moving average is nearby, at $8.40 in the case of the 30-sma. If triggered we will set the stop at $7.20, giving AMR room to pull back to the 61.8 percent retracement of the rally off the July low, but no more room than that. We really don't want to follow AMR if it drops all the way back to $6.00, where it will again retest the top of the channel in which it declined for so long. Our first target will be $14.90, at which point we strongly suggest that readers take partial profits. The second will be $18.90. Expect turbulence if the trade is triggered and AMR rises again toward $10-13, where it has been encountering turbulence over the last two weeks. For the protection of readers entering a risky long trade on a risky stock, we suggest that, if triggered, readers consider collaring the trade. This would be accomplished by selling one long call contract for each 100 shares of stock purchased and using the proceeds to pay most of the premium for a put, one contract per each 100 shares. For example, if readers had bought 100 shares of AMR at Friday's close for $11.74, they could then have sold one contract of the SEP $15.00 call at the bid of $0.55 and used those proceeds to mostly pay for the purchase of one SEP $9.00 put at the ask of $0.70, or alternately, paid for about half of the purchase of the SEP $10.00 put at an ask of $1.05.
Picked on August xx at $xx.xx <-- see TRIGGER
New Short Plays